AN ANALYSIS OF CURRENCY OVERLAYS FOR US PENSION PLANS

With the continuing movement toward higher international investment allocations, U.S. pension funds need to assess their currency management policies and practices. The use of an overlay strategy to manage currency risk has increasingly become a viable option for such investors. In this article, the author evaluates the impact of a currency overlay strategy for a U.S. pension fund through a series of mean-variance analyses. He concludes that any decision to hire a currency overlay manager should be based on the ability of a well-diversified investment portfolio to absorb currency risk, and that it must also consider all the costs associated with maintaining a currency overlay strategy.